UK rates: Weekly review

The Charter for Budget Responsibility is committed to permanent surpluses "in normal times", but the wisdom of a binding commitment is questioned by many commentators. Asset swaps do not suggest an imminent loss of fiscal credibility with 10y spreads underpricing recent fiscal improvements. 

Data remain mixed, with the unexpected fall in inflation taking the economy into outright deflation, while unemployment has fallen to a seven-year low. But even as unemployment fell, hours worked did not rise, suggesting the recent Q2 15 gains in productivity might fall away in Q3 15 as growth slows. Gertjan Vlieghe, the newest external member of the MPC, made dovish remarks at the Treasury Select Committee, saying that he saw the neutral rate as somewhere between 1% and 3% and that inflationary risks lie to the downside. Perhaps the most important development this week has been the government's Charter for Budget Responsibility passing through the House of Commons by a vote of 320-258. 

The charter sets out the framework under which the government will manage its debt and public finances with two distinct aims: to ensure the sustainability of the public finances and support monetary policy in stabilising economic fluctuations. The key elements in the charter for the fiscal mandate, as stated in the legislation, are as follows: 

• "In normal times once a budget surplus has been achieved, the Treasury's mandate for fiscal policy is:
   
• A target for a surplus in public sector net borrowing (PSNB) in each subsequent year."

The key phrase here is "normal times", which is defined as periods in which the OBR decides the UK has faced a "significant negative shock", itself defined as real GDP growth of less than 1% on a rolling 4-quarter on 4-quarter basis. The current period is defined as such a period, so the Treasury's current fiscal targets are a surplus by FY19/20 and PSND falling in each year.